"Bullshit," writes Princeton Philosophy Professor Harry Frankfurt in his best-selling book, "is a greater enemy of the truth than lies are." No one can dispute the pervasiveness of BS, which Prof. Frankfurt defines as a statement that is, “short of lying” but is still a deliberate misrepresentation, told by someone who "is trying to get away with something...[H]e is attempting to lead us away from a correct apprehension of reality."
Which brings us to the arguments against allowing a regulated financial institution to build balance sheet equity. To me, the idea of repudiating balance sheet equity, for the GSEs or any other company that assumes credit risk, is pure poppycock.
Kroll Bond Rating Agency all but ignored the first question in its report, “Housing Reform 2017: Can the GSEs be Privatized?" It simply failed to consider how Fannie Mae and Freddie Mac had been self-supporting for more than 35 years, right up until the day they were apprehended by the government. "KBRA reminds all concerned with the issue of housing finance reform that the GSEs failed because of a loss of confidence and market liquidity, not inadequate capital,” it says.
In response I wrote, "GSEs Have Been Ill-Served by Balance Sheet Equity Experiment," One excerpt:
[W]e know with absolute certainty why the GSEs' balance sheet capital remains close to zero. The Federal Housing Finance Agency engineered it that way. It chose to reduce Fannie and Freddie's equity by $250 billion in order to fund cash dividends to the Treasury. Irrespective of what Bright or anyone else thinks, the FHFA's decision-making could never be described as normal. It is never normal for an undercapitalized, regulated financial institution to pay cash dividends. It is never normal for a conservator to authorize any cash dividends prior to the company's emergence out of conservatorship.
I've posted a draft of a paper (see the button for GSE Reform Paper, above) that describes the evolution of the Washington consensus that deemed GSE reform to be synonymous with GSE abolition. This part of the paper covers the early weeks of 2011, which coincided with the release of final reports by the Financial Crisis Inquiry Commission and by the Department of Treasury with regard to housing finance reform.
"GSE Reform and a Conspiracy of Silence," should remind us of an essential skill for anyone in business, or anyone who wishes to be an informed voter. You must always keep your ears open for what people aren't talking about. And then you must figure out why they aren't talking about it. The collective silence from GSE reform advocates with regard to critical issues in mortgage lending seems deafening.
I agree with Dave Dayan in The Atlantic and Natalie Earhart in The Real Daily who pointed to a painful truth. The Obama Administration simply failed to grapple with the mortgage crisis in a meaningful way.
Indeed, when the country faced millions and millions of distressed mortgage loans, I think the President had only one viable option, which was probably too radical to be pursued or even discussed. The government needed to take control of the mortgage servicers.
In theory could you have private ownership of the GSEs? Yes. But we treat them as sovereigns right now. They are triple-A credits. So the moment you convince the bond market they are no longer a fully supported by sovereign entities, the U.S. Treasury. I think the nature of their operations will change. The spreads will change and the cost of loan to a consumer will change. How you do that is a complicated thing.
Mortgage lending is about risk diversification. As his latest blog demonstrates, few write about the subject with as much eloquence and precision as my friend, former Fannie CFO J. Timothy Howard. Whereas most advocates of GSE reform and GSE risk sharing transactions seem to ignore the issue. Maybe that's because their proposals, when evaluated in terms of risk diversification, lose credibility.
The old "implicit-guarantee-of-GSEs-didn't-work-so-make-the-government-guarantee-private-mortgage-securitizations" routine
Speaking on a panel on GSE reform at the Annual Distressed Investing Conference, Michael Frantantoni, chief economist for the Mortgage Bankers Association, invoked the, "implicit-GSE-guarantee-didn't-work-so-we-must-have-an-explicit-government-guarantee-of-residential-mortgage-securitizations" meme. As he put it:
What were some of the issues? A lot of it had to do with the ambiguity of these [government sponsored] enterprises. What was talked about was an implicit guarantee. You remember that during the end of June 2008 there were concerns about Freddie's ability to roll over their short term debt. And if you read Hank Paulson's biography, he was allegedly being threatened that China and Russia were going to pull back on their holdings of GSE securities, right?
Real money talks. It says the oft-repeated meme about Fannie Mae and Freddie Mac—that they ran a, “failed model of private gains and public losses that once forced taxpayers to write a $188 billion bailout check”—is a big fat lie. If I wrote the Fact Checker column for The Washington Post, I would assign four Pinocchios to the above quote by Sens. Bob Corker and Mark Warner. The claim is indefensible because the so-called losses, which triggered the so-called bailout, were bogus. Those massive non-cash accounting provisions, booked for fiscal years 2008-2011, were reversed by the end of 2013. Absent those illusory losses, the bailout of both companies would have approximated zero. Which is why the GSE business model never, “forced taxpayers to write a bailout check.”
"To see what is in front of one’s nose needs a constant struggle," wrote George Orwell, who aptly described the litigation surrounding the Third Amendment to the Senior Preferred Stock Purchase Agreement, under which the Department of Treasury purchased $187 billion in equity to "bail out" Fannie Mae and Freddie Mac.
What’s in front of everyone’s nose is that a conservator drained a quarter trillion dollars in equity out of two undercapitalized corporations. To anyone who ever completed a course in accounting or corporate law, what is in front of everyone’s nose should be easy to figure out. The cash dividends, which drained $250 billion out of Fannie and Freddie, were patently illegal.
In 2011, The Washington Post published "The Big Lie goes viral," by Barry Ritholtz, who refuted the popular myth that affordable housing goals imposed on Fannie Mae and Freddie Mac were a central cause of the financial crisis. But, like an ever-tenacious virus, a Big Lie keeps mutating, as evidenced by a Post editorial, "This Fannie-Freddie resurrection needs to die."
Denying the impact of derivatives
If you ever doubted that Douglas Holtz-Eakin is a shameless hack, read what he wrote in an R Street Policy Study titled, "Sizing Up The FCIC Report Five Years Later." His perversions of history would have embarrassed Kurt Waldheim.
"Fannie and Freddie are doomed according to the Washington way of thinking about it," said Peter Wallison. "We’re going to get rid of them somehow, so why even bother thinking about things like this." Wallison, from the American Enterprise Institute, addressed a conference hosted in September 2013 by a newly launched conservative think tank at NYU Law School. The panel discussion was titled, "The Reorganization of Fannie and Freddie."
Wallison mentioned "things like this" in reference to the legal claims asserted by GSE shareholders, who argued that a revision to the Senior Preferred Stock Purchase Agreements, the notorious Third Amendment earnings sweep designed to drain all corporate equity by way of cash dividends to the U.S. Treasury, was illegal.
"The content of this report, in my view, cannot be legitimately questioned,” said Rep. Richard Baker (R–La), who cited the imprimatur of a Big Four accounting firm. “Utilizing the firm of Deloitte & Touche and the staff of OFHEO [Office of Federal Housing Enterprise Oversight], the director's report is delivered after review of over 200,000 documents and e-mails, as well as hundreds of interviews and depositions of current and former staff of Fannie Mae,” he said. The hearing he convened on October 6, 2004 was titled, "The OFHEO Report: Allegations Of Accounting And Management Failure At Fannie Mae."
Sooner or later, a litigator sits down with his client to explain why a negotiated settlement is preferable to trial. All litigation is a crapshoot and corporate defense lawyers are expensive. At the end of the day it doesn’t really matter who is right and who is wrong. What matters is the price you pay to walk away from a lawsuit and get on with your life.
Stubborn or principled?
But White House officials played a unique role in the decision to impose the Net Worth Sweep, and this fact cannot be seriously disputed in light of the materials attached to the plaintiffs' motion...As this Court has already observed, "[h]igh-ranking officials within an agency, corporation, or other institution are not fungible," [.] and the communications of such officials are not fungible either.Otherwise, the law firm made a very compelling case against the government's assertion of the Deliberative Process Privilege and the Bank Examination Privilege. One sure bet, the government won't accede to the requests for additional information without a fight.
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